GST 2.0: Compensation Cess Removed on Most Goods, Sin Goods Still Under High Tax Net
When GST first came into effect in 2017, states were concerned about the revenue loss. Hence, to decrease their tension, the Central Government launched a special type of tax called compensation cess on certain goods, mostly on luxury and sin products.
The GST Compensation Cess is an additional tax imposed on certain goods and services in India under the Goods and Services Tax (Compensation to States) Act 2017. The primary purpose of this tax is to compensate states for any revenue loss they might experience due to the implementation of the Goods and Services Tax (GST). This cess is levied on specific “demerit” or “sin goods,” like tobacco and pan masala, and some luxury items, such as certain motor vehicles and aerated drinks, in addition to the standard GST rates.
Under the GST 2.0 reforms, the government is planning to remove compensation cess on most goods, effective from September 22, 2025. However, compensation cess has been removed on only selective goods; sin goods like tobacco and tobacco-related products (cigarettes, pan masala, gutkha, chewing tobacco, and bidi) will continue to attract the same amount of cess as before until the government releases further orders regarding this and outstanding GST compensation loans and interest are completely repaid.
As the government has removed GST and compensation cess on most of the items, they will become cheaper to afford. For businesses, this creates problems like leftover tax credits they cannot use and how to handle old stock.
Below are some items on which compensation cess has been removed:
- Consumer electronics and appliances
- Automobiles and vehicles (moved under new GST slabs)
- Coal and other raw materials where cess was earlier applied.
One can also identify if the cess has been removed on particular goods by checking if the notified new GST rate on them includes the cess amount. If not, that means the cess has been removed on that item.
Below are some items that still attract compensation cess on them:
- Cigarettes
- Pan masala
- Gutkha
- Chewing tobacco (like zarda)
- Unmanufactured tobacco and bidi
The government has not made changes to the existing GST rates and compensation cess on these items. While GST rates on such goods have been further raised to 40%. The cess structure is the same as earlier.
Problems Faced by Businesses:
- Unutilized Cess Credit Balances
Numerous business holders, especially automobile dealers, have, over time, collected large amounts of excess credit balances. With the new move of the government, the compensation cess has been removed; now these businesses have no chance left to adjust these credits in the future. If the government does not allow refunds or special rules, these credits might expire, leading to heavy financial losses.
- Old Inventory
The dealers who still hold old stock purchased on the basis of old GST rates, also including compensation cess, will be highly damaged by the new GST reform 2.0. After the implementation of these reforms, these dealers will not be able to sell their old stock at the price benefiting them, as GST rates and compensation cess have been scheduled to be reduced and removed, respectively, on most goods. This will ultimately lead to a cash-flow loss and may force discounting or write-offs.
- Consumer Pricing
The government has announced a reduction in GST on most items; however, the final benefit will only be seen when businesses pass on this reduction to consumers. These companies will need to change the MRP on their products using stickers or new packaging. To ensure this happens, the Legal Metrology Department will keep a close eye on companies.
- Tobacco Exception
Individuals consuming sin goods like cigarettes, pan masala, or tobacco products will not get any relief on their pricing; these goods will continue to sell at the same existing GST rates and compensation cess.
